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Oil Weekly Outlook For March 4-8

March 3, 2013

During the previous week, oil prices (WTI & Brent) continue their downward trend: WTI decreased by 2.63%; Brent oil, by 3.24%. As a result, the gap between the Brent oil and WTI contracted again; the gap between Brent and WTI ranged between $19 and $21. According to the recent EIA report, oil stockpiles declined again by 5.9 MB. Will oil continue to dwindle next week? During the upcoming week, several publications may affect the oil market. These items include: U.S non-farm payroll, U.S trade balance, U.S factory orders and EIA oil weekly update.

Here is a weekly projection and analysis for the crude oil market for March 4th to March 8th:

Oil Prices – March

During last week, crude oil price (WTI) declined by 2.63% and reached by Friday $90.68/b; Brent oil also fell by 3.24% to $110.4/b; during last month, WTI oil declined by 5.58%; Brent oil, by 3.61%.

In the chart below are the changes in WTI and Brent oil prices during January-February (rates are normalized to January 31st). As seen below, the prices of oil have had a downward trend in the past couple of weeks.

Premium of Brent over WTI – March

The difference between Brent oil and WTI spot oil has contracted during the previous week as it ranged between $19 and $21 per barrel. During last week, the premium fell by 6%.

Oil Stockpiles – Declined by 1.2 Mb

The oil stockpiles fell again by 5.9 MB and reached 1,784.7 million barrels. The linear correlation between the changes in stockpiles remained mid-strong and negative: this correlation implies that the price of oil, assuming all things equal, will moderately increase next week. The next weekly update will be published on Wednesday, March 6th and will pertain to the week ending on March 1st.

Main Oil Related News Items for the upcoming week

Wednesday – U.S Factory Orders: This report will present the changes in U.S. factory orders of manufactured durable goods during February; in the previous report factory orders rose by 1.8%; this report will offer some insight to the developments of the U.S economy and could affect the direction of the U.S dollar;

Thursday –American Trade Balance: This monthly update for January will show the recent developments in imports and exports of goods and services to and from the U.S, including commodities such as oil and natural gas; based on the recent American trade balance report regarding December the goods and services deficit declined during the month to $38.5 billion;

Friday – U.S. Non-Farm Payroll Report: in the recent report for January 2013, the labor market expanded again: the number of non-farm payroll employment increased by 157k; the U.S unemployment rate remained 7.9%; if in the upcoming report the employment will increase again by well above 120 thousand (in additional jobs), this may lower the chances of the Fed augmenting its monetary policy (see here my last review on the U.S employment report);

Foreign Exchange and Oil Prices Relation – March

The EURO/USD fell last week by 1.3%. The AUD/USD also declined by 1.13% during the previous week. The correlations among these currencies pairs (Euro/USD) and oil prices remained strong and robust. E.g. the linear correlation between the rate of oil and EURO /USD was 0.61 during February-March. If the U.S dollar will continue to strengthen against the “risk currencies”, this may adversely affect oil prices.

Oil Prices Outlook and Analysis

Following the sharp tumble in the prices of oil in the past couple of weeks, oil prices might start the week on a positive note as a correction to the tumble at the of February, but the prices of oil might resume their downward trend as the week will progress. From the supply side, the currently calm situation in the Middle East (relatively to how it was a few months back; this situation could also erupt very promptly), the rise in production in the U.S are contributing to the decline in oil prices. From the demand side, the slowdown in Europe and slow progress in China and U.S may have contributed to the expected drop in growth in demand for oil. These factors may keep pulling down oil prices. Moreover, the gap between Brent and WTI oil ranged between $19 and $21 and might continue to slowly shrink in the coming days as the US economy is progressing (WTI oil) while the EU economy (Brent oil) is slowing down . On the other hand, several factors worth noticing that could pull up oil prices: the Oil stockpiles declined again last week, which could pull up oil prices in the U.S this week. The upcoming reports on U.S trade balance, non-farm payroll reports and factory orders could affect the path of oil from the projected demand side; if these reports will present growth in economic activities, they could help rally oil prices. Finally, if major currencies such as the EURO will continue to decline against the U.S. dollar, they may also pull down oil prices.The bottom line, I guess the prices of oil will continue to decline on a weekly scale.

My guess is that WTI oil will range between $86 and $90 and Brent between $108 and $112 during the week.